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RBI tightens inflation, credit growth targets

INITIATIVES GALORE: Y. V. Reddy (left), Reserve Bank of India Governor, announcing the credit policy for 2007-08 in Mumbai on Tuesday. To his left is Rakesh Mohan, Deputy Governor, RBI.

Oommen A. Ninan

Continues liberalisation of forex outgo

Apex bank leaves key rates unchanged

Risk weight on housing loans reduced

To consider branch licences to well managed UCBs

MUMBAI: Tightening the inflation and credit growth targets, the Reserve Bank of India (RBI) on Tuesday decided to contain inflation close to 5 per cent during 2007-08 compared to the previous year's target of 5 to 5.5 per cent. Going forward, in the medium term, the resolve of the central bank is to attune policy and perceptions for inflation in the range of 4 to 4.5 per cent.

"In case there are no domestic and global shocks, inflation can be contained at these levels ..and maintaining, inflation at acceptable level is important for growth," said Y. V. Reddy, Governor, RBI, while announcing its Annual Policy for 2007-08.

"We have to bring down money supply from 20 to 17-17.5 per cent, in consonance with the outlook on growth and inflation," said Dr. Reddy adding, "we will remove excess credit, not affect the credit growth."

"Assuming no further escalation in international crude oil prices and barring domestic or international shocks," the central bank placed the gross domestic product (GDP) target at 8.5 per cent for 2007-08.

The RBI kept the indicative long-term rate (Bank Rate) and short-term rates (Repo Rate and Reverse Repo Rate) unchanged. However, the central bank stated that "it would respond swiftly with all possible measures as appropriate to the evolving global and domestic situation impinging on inflation expectations and the growth momentum."

In tune with past policy statements, RBI raised further annual outward remittance limit for individuals to $100,000 from $50,000 and aggregate ceiling on overseas investment by mutual funds to $4 billion from $3 billion and allowed prepayment of external commercial borrowings up to $400 million ($300 million). The limit for portfolio investment abroad in listed overseas companies by listed Indian companies has been enhanced from 25 per cent of net worth to 35 percent of net worth.

The RBI reduced the interest rate ceiling on Foreign Currency Non-Resident (Banks) deposits and Non-Resident (External) Rupee Account (NRE) deposits by 50 basis points in view of large capital inflows, inflation and interest rate differentials between India and the rest of the world, and the debt-creating nature of such deposits.

Housing loans

Among its major announcements, the RBI decided to reduce the risk weight on residential housing loans up to Rs. 20 lakh to individuals from the existing 75 per cent to 50 per cent as a temporary measure. This would be reviewed after one year. Said Dr. Reddy, "Banks were told to give relief to people who take loans up to Rs. 20 lakh."

The RBI also reduced the risk weight on loans up to Rs. 1 lakh against gold and silver ornaments to 50 per cent from the existing level of 125 per cent for all categories of banks. RBI stated that such loans were commonly availed of by the poorer sections of the society in both rural and urban areas.

These loans entail relatively low risk as they are extended with adequate margins and the collateral (gold and silver) is easily marketable, particularly where the size of the loan is small. The apex bank decided to dispense with the requirement of `no due' certificate for small loans up to Rs. 50,000 to small and marginal farmers and share-croppers.

It also decided to accept certificates provided by local administration and panchayati raj institutions regarding the cultivation of crops in case of loans to landless labourers, share-croppers and oral lessees.

Dr. Reddy said the RBI had decided to consider granting of branch licences to well-managed and financially sound Urban Cooperative Banks in States that have signed Memoranda of Understanding with the RBI. "We will also consider giving licence for new urban cooperative banks later," Dr. Reddy added.

He said UCBs needed capital infusion and the central bank would issue guidelines to UCBs on the various options for raising capital by May 31, 2007.